Goldman's S&P 1,575 Call: 4 Ways To Play It

As we get closer to the end of 2012, it is time to look to position our portfolios for 2013. If you have been long stocks this year, you have likely done very well - but will the rally continue? If you believe Goldman Sachs' call for the S&P 500 at 1,575 by the end of 2013, we will present some ways to profit from the continued rally using options on the SPDR S&P 500 proxy ETF, (NYSEARCA:SPY). These positions could also be reversed if you do not believe we will rally in 2013 and would like to short the SPY instead.

The Fiscal Cliff situation has already received an eternity's worth of news coverage already so I won't bore you with more. However, Goldman's premise appears to be that we will have a sharp, quick selloff into the end of 2012 on uncertainty about the Cliff (target of 1,250), followed by a powerful rally throughout 2013 on the resolution of the Fiscal Cliff. Goldman cites earnings multiple expansion for the S&P as a contributing factor for the lofty price target. While I'm not here to debate whether Goldman is right or wrong or whether the Fiscal Cliff will get resolved or when, Goldman's opinion is still interesting and widely followed. You are capable of making your own determination as to whether the S&P will rally to 1,575 next year. I will simply present some ways to take advantage of the rally if it does occur as Goldman Sachs suggests it will.

Please note, I am using the Goldman 1,575 call and their basis for their price target as the premise of this article - it doesn't necessarily mean I think the S&P will end at 1575 next year but I do believe we will rally. I note the 1,575 target on the Profit and Loss graphs only for some perspective on each trade since I am using the Goldman call as the premise for this article. I fully realize we may not hit 1,575 and in fact, may not rally at all in 2013. The range of prices from SPY 122 - 162 is shown as I believe that range will contain all prices for 2013. Again, this may not happen, but I think S&P <1,220 and S&P >1,620 next year are very unlikely.

Now that the requisite disclaimers are out of the way, let's move on to the trades. As always, you should always do your own due diligence before putting on any of these trades mentioned here or any other trades.

**Please note, all option prices shown are the midpoint between the Bid and the Ask at the time of writing and all calculations exclude commissions for simplicity's sake.

December 2013 147 Risk Reversal (Short Put/Long Call)

This trade involves:

Shorting 1 147 Put and buying 1 147 Call on the SPY expiring in December 2013. This offers the advantage of providing a margin of safety from today's SPY price (about 142) and participating nicely on the upside if we do rally, with potentially unlimited profit (and loss). Here are the purchase prices for the options in this position and some stats for this trade at expiration:

147 Put Price

$15.10

147 Call Price

$6.00

Break Even Point on SPY

$138

Maximum Loss within SPY range of 122-162

$16

Maximum Profit within SPY range of 122-162

$24

Profit at Goldman target of SPY 157.5

$19.50

(click to enlarge)

December 2013 Long 142 Call/Short 137 Put

This trade involves:

Shorting 1 137 Put and buying 1 142 Call on the SPY expiring in December 2013. This trade offers an even more sizable margin of safety than the first one (break even at ~$135) and participating on the upside if we do rally, again with potentially unlimited profit (and loss). Here are the purchase prices for the options in this position and some stats for this trade at expiration:

137 Put Price

$10.18

142 Call Price

$8.42

Break Even Point on SPY

$135.24

Maximum Loss within SPY range of 122-162

$13.24

Maximum Profit within SPY range of 122-162

$21.76

Profit at Goldman target of SPY 157.5

$17.26

(click to enlarge)

December 2013 137/146 Bull Call Spread

This trade involves:

Buying 1 137 Call and shorting 1 146 Call on the SPY expiring in December 2013. This trade is undoubtedly for a more conservative options trader as upside and downside are pretty limited. This trade is very simple and offers limited risk and limited profit, with break even almost exactly where we trade today on the SPY and maximum profit at 146. Here are the purchase prices for the options in this position and some stats for this trade at expiration:

137 Call Price

$11.28

146 Call Price

$6.44

Break Even Point on SPY

$141.84

Maximum Loss within SPY range of 122-162

$4.84

Maximum Profit within SPY range of 122-162

$4.16

Profit at Goldman target of SPY 157.5

$4.16

(click to enlarge)

December 2013 137/146 Bull Call Spread and Short 137 Put

This trade involves:

This is my favorite trade of the bunch. It involves buying a 137/146 Bull Call Spread and shorting one of the 137 Puts. This trade provides the biggest margin of safety (break even of $131.66) of all the trades presented here and reaches maximum profit at only SPY 146, which is only ~3.5% up from here. This trade does, unfortunately, require a good bit of margin so that must be taken into consideration if you are going to put this on or something similar. You could also adjust the strikes of this structure to better suit your views on the market and risk tolerances. Here are the purchase prices for this position and some stats for this trade at expiration:

137 Call Price

$11.28

142 Call Price

$8.42

137 Put Price

$10.18

Break Even Point on SPY

$131.66

Maximum Loss within SPY range of 122-162

$9.66

Maximum Profit within SPY range of 122-162

$14.34

Profit at Goldman target of SPY 157.5

$14.34

(click to enlarge)

Conclusion

If you believe that, despite a very nice 2012, we are going to rally hard in 2013, I have presented four ways to take advantage of a pronounced, medium term upward move in the SPY. They do require some margin but if we do rally, the rewards can be tremendous with relatively subdued risks. As noted earlier, if you don't think we are going to rally in 2013, you can certainly flip these trades around and make them bearish. Additionally, you could mix and match what I've presented to suit your risk tolerances, individual views on the market in 2013, and any margin restrictions you may have. If you have any thoughts on what I've presented, I'd love to hear them in the comment section.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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